Chinese Policies Effect On Automotive Industry Economics Essay

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The Chinese automotive industry has experienced rapid expansion over the last 30 years from a bare and sluggish existence before 1978, to a point where it has now overtaken the USA and Japan to become the world's largest automotive assembler. It represents a comprehensive spatial change in the industry and an industrialisation that has run to a certain extent alongside the Chinese shift and development from a command economy to a self described "socialist market economy" (OECD 2005). Market reformation and growth can be prescribed to be the function of many factors, from increased demand and institutional liberalisation, to the influx of FDI. In analysing the framework and industrialisation strategies taken in the China's pursuit of this large growth, these multiple factors have no doubt had an influential part in the industries development. However in order to address the industries growth in full it is going to be investigated from the view these factors although each holding their own crucial positions, they are embedded within, and consequences of Chinese automotive policies and policy reformation.

Industrial Strategy and Growth.

The automotive industry is a key sector in the analysis of China's economic growth, and with its continuous expansion, it poses many industrial, political, social and environmental issues. With the transformation of the Chinese economy and its automotive industry, (both having a huge impact on their respective environments), investigating the growth of the sector portrays an important image of the intermeshing of various actors: the industry, its clients and the state (Richet. X, Ruet. J, 2008). In this case, the automotive industry is a complex and advanced system dominated by an oligopoly of MNC's, with high levels of technological change, along with institutional and regulative pressures creating high entry barriers. So in order to implement technological catch up and establish growth, strong industrialisation strategies are needed through governmental policy formation and implementation. (Sit, Victor. F.S, Liu, W, 2000).

As categorised by Chaudhuri (1989) cited in (Sit, Victor. F.S, Liu, W, 2000) the automotive industry in emerging markets can be described with two models. The independent, private and domestically owned industry situated at one pole such as South Korea, which through its policy control from the outset perused an industrialisation strategy that was based on exports. Carefully managing the inflow of FDI in order to gain technological and capital in turn to compete and establish a successful domestically owned industry. A different path is also available, in the foreign owned subsidiary of a MNC based industry, as is the case in Brazil, where the automotive sectors growth emerged as a result of FDI from MNC's and their interaction and co-existence with Brazilian governmental policies. The gap between the emerging "late comers" and the "developed" world's automotive positioning is too large for it to develop in isolation. Hence MNC's are going to be required for technological and capital assistance along with some form of strong state guidance in industrial policies and regulation in order to establish a competitive domestic automotive industry. In addition to this, the policies implemented by the state shapes the role and the industrialisation strategy that is followed and it itself can be further characterised using differentiating models.

From a historical perspective the shift away from exportation of raw materials and agriculture towards local manufacturing of products, decreasing the dependency upon imports can be viewed as a compulsory movement in order for economic development. These emerging local manufactures in order to succeed and compete against rich established foreign firms need protection and public investment in national infrastructure and supporting factors (Evans, P. 1997). This method of import substitution industrialisation (ISI) provides the description of governmental policy as a development planner or an entrepreneurial sate, where by the main focus of industrial growth and progression is to serve the domestic market. Then offering an alternative route is the role of governmental policy as the developmental state, where by export orientated industrial strategies (EOI) are implemented in order to develop the industry. As was the case in Japan, whereby public investment was made in essential infrastructure and entrepreneurial organisations, offering encouragement to make long term investments with the view to export (Evans, P. 1997). Here it can be seen that governmental policies and policy implementation plays a pivotal role in the growth of an automotive sector. These frameworks can be applied to the analysis of the Chinese automotive growth, however flexibility is required as with emerging industries, they are path dependent and therefore route used by Chinese is different to that of other national automotive systems.

China's rise.

Since China's opening and reform it has moved from production of around 30 000 vehicles of which were pronominally "heavy good vehicles" in the late 1970's, to become the world's fastest growing automotive producer with an even more dramatic increase since 2000, now producing around 13 million vehicles (Tang, R, 2009) (The Economist 2009) see figure 1. This also represents product diversification and a shift in production from mainly heavy goods vehicles such as cargo trucks and small to medium sized vans, which in 1980 made up 75% of the limited vehicle production. To a model that is closer to that of a mature industrial market with increased levels in production of passenger cars and light vehicles. Production in passenger cars now contributes to more than 50% of total production, responding to the increased domestic demand, reaching around 6 million units in 2009 (Tang, R, 2009).

Change in Policies.

Suppressed for many years and under absolute control of the Chinese command economy before the 1980's the Chinese automotive market has grown due to the liberalisation of policies and further policies that have been established to increase domestic demand and acquire technological knowledge and capital. In the 1980's imports massively exceeded the domestic production of automobiles. In the year 1995-1996 China legally imported around 150 000 cars, representing a dramatic increase and greatly exceeding the amount of domestically produced vehicles (Sit, Victor. F.S, Liu, W, 2000). Resultantly this began opening up the Chinese government's eyes to the huge domestic demand for cars, and raising concerns on the drain of national currency. Consequentially a decision was made to embark on the expansion of the automotive industry, in an attempt to replicate Americas rise to industrial glory, making the automotive industry a pillar of its economic growth (The Economist 2009).

In the 1980's there came the first move towards increased decentralisation, an attempt towards a market economy, change of power with assignments of large automotive conglomerates to regional provinces and the creation of policies to offer preferential environments in an attempt attract FDI (Sit, Victor. F.S, Liu, W, 2000). This combination led to an increase in interest and an inflow of FDI into the auto market. In relation to the models of entry strategies categorised by Chaudhuri (1989) and import substitution strategies whereby the MNC's are allowed to enter the market under the pretences of access to the market along as they abide by such restrictions as high local content in production. Along with the alternative method of export oriented strategies, attempting to nurture national firms through control of FDI with motivation to export. The Chinese government has implemented a dual approach that positions them somewhere between the two. Their main goal and long term vision is centred on developing their own national automotive market, also with the eventual view to export. However, willing to play the long game, they have allowed FDI from MNC's in the form of joint ventures, imposed limiting policies with the clear intentions of import substitution (Sit, Victor. F.S, Liu, W, 2000). In response to this, the foreign subsidiaries were subject to somewhat inefficient control through various policy restrictions, heavily constraining the importation of parts, and policies based on encouraging and ensuring high regional content. However although this FDI and new regional competition has allowed growth, in 1994 the Chinese government introduced more concrete policies to provide a more integrated approach installing official regulation, restricting all FDI in automotive assembly to joint ventures, with foreign enterprise's having to maintain a minority stake. In addition the 1994 China automotive Industrial Policy provides clear descriptions on joint venture relationships. Prescribing that JV must establish local R&D facilities, facilitating preferential tariffs for increased local content in production, along with other factors that are concerned with the protection of the domestic production. While at the same time allowing globalising forces and FDI to increasingly converge in order to achieve technological spill over and improve international competitiveness. (Sit, Victor. F.S, Liu, W, 2000). By 1998 the influx of FDI consisted of various joint ventures into auto parts and smaller specialist assemblers, with major joint ventures being partnered with the major domestic partial sate controlled automotive assemblers, to form Shanghai-VW, Shanghai-GM, FAW-VW (in Changchun), SAW-Citröen (in Wuhan), Beijing-Cherokee, Guangzhou-Peugeot (Guangzhou-Honda since 1998), and Chang'an-Suzuki (in Chongqing). These joint ventures contributed to around 80% of total car production in China with 50% coming solely from the foreign subsidiaries and representing $7.39 billion in FDI (Sit, Victor. F.S, Liu, W, 2000).

However, these JV are still heavily controlled by state governance and unlike in other situations where the foreign MNC investigates the market searching for the best partner. In the case of China the MNC is picked by the Chinese organisation in correlation to government planning and paired up with a domestic conglomerate under governmental supervision and permission (Sit, Victor. F.S, Liu, W, 2000). So here the MNC's have very little freedom, or choice in terms of investment and business decisions, the FDI is very much the product of and embedded in the government's policies and planning. These policies have triggered the heavy development of the auto parts sector with heavy localisation in the sourcing of assembly parts. In the auto parts sector, governmental policy has taken a much more liberal position towards foreign investment, with many of the suppliers of auto parts to the MNC's in automotive assembly following them to China and setting up joint ventures with domestic producers. This led to an increase in development in the manufacturing and quality of auto part production working alongside assembly, with Shanghai-VW achieving 80% in local content in 1998 (Sit, Victor. F.S, Liu, W, 2000).

Fostering the emerging automotive industry, governmental policy has imposed high tariffs on the importation of assembled products, offering MNC's access to the increased demand within China solely through FDI and JV, demonstrating a model of Import substitution. Strict control over the FDI has put majority of the power initially in that corner of state planning and protectionism, with a slow decentralisation and spatial shifts occurring as time progressed, hindering the MNC's from dominating the changing market which has been the case in other emerging markets (Sit, Victor. F.S, Liu, W, 2000). This compliment to the looser control on the auto parts market has allowed the move into initial stages of the prescribed industrialisation strategy model, with a spatial shift in auto production to the production of basic assembly parts, and development of domestic brands, demonstrating primary import substitution industrialisation. Resultantly domestic car usage dramatically increased to around 13 million users in 1998 (see figure 2), with production of passenger cars beginning to exceed 500 000 units and total production exceeding 1 million units by the year 2000 (see figure 3) however with very limited or no exportation.

2000-2010, WTO, Policy Reform and Rapid Expansion.

Before the year 2000 the majority of auto production was focussed towards heavy duty vehicle production, with product mix and orientation subject to governmental intervention. The leading vehicle producers were JV's with MNC's, where governmental decisions would voice what product would be assigned to an automotive JV, with the end result often being that most of the foreign subsidiaries produced products that were not best suited to the market conditions. However in 2000 China changed its policies and granted foreign ventures the permission to produce small affordable passenger cars, known as "people cars" in order to meet the waking domestic demand resulting from a social shift and increase in middle class (Tang, R, 2009). This latest liberalisation of product regulations now started to locate the market in a stronger position for long term growth and further opening in view of its 2001 accession into the WTO. With its accession into the WTO in 2001, it presented certain problems for the Chinese automotive industry in terms of deceased protection of its domestic producers against international competition, due to decreased import and protectionist tariffs that are attached with WTO membership. A shift in thought was needed in order to encourage the Chinese automotive industry to improve in both cost and quality in order to compete with international competitors. In 2004 the Chinese government introduced a new modified industrial development policy in order to replace the 1994 attempt, which in light of recent rapid growth from 2000, had rendered it a bit outdated.

In 2004 90% of all car production was from Sino-foreign ventures, so under the policy there remains limitation on a maximum of 50% ownership, however if located in an export area with a view to export (in order to improve quality to meet world standards) with special state permission no maximum ownership can be applied. Outlining the new policies, sourced from KPMG (2004) the policy also introduced new restrictions on new investment, applying a minimum investment quota increasing the barriers of entry for competitors from other sectors. Higher tariffs have also been impeded on certain criteria specific imported parts and conditions of imported vehicles with the view to encourage and promote the use of advanced technology, large scale market development and the advancement of the domestic parts industry. With further industry development in mind, there became applicable tax breaks on R&D investment in order to encourage local research and the development of local innovation systems and indigenous intellectual property, along with support for private enterprises, and standardisation of practices allowing a more fair and transparent market for consumers and manufactures (KPMG 2004). The new policies allow China to maintain a stake in, and exercise a amount certain control over the industry but with the mind for future expansion and mastery of the industry. Higher barriers of entry along with further incentives towards local development of intellectual capabilities and advancement in auto part production encourages the domestic competition in order to improve quality and the hopeful eventual emergence of domestic winners capable of competing on the world market.

Further policies were implemented in 2009 in order to encourage growth in the form of fiscal stimulus offered in rural subsidies and tax cuts on small cars. As mentioned car output grew slowly between 1978 and 2000, however post 2000 rapid growth in production commenced with production increasing from about 0.6 million units to 5 million units in 2005 with over 50% being passenger vehicles. Again output continued to grow rapidly increasing to around 9 million units in 2008, with 65% comprised from passenger car production (Tang, R, 2009). A further surge in China's unprecedented recent growth in 2009 shot production up to over 11 million units, with 1.21 million units sold in the month of October, which is a 72.5% year on year increase (Tang, R, 2009) (see figure 4). This massive increase in sales in response to huge increase in demand is both the function of early policy reform and the recent fiscal stimulus which provided undoubted aid to the increase and put it on track to become the largest auto producer. A rapid advancement has occurred within the Chinese automotive industry since 2000, and can be understood through the industrialisation strategy framework outlined which as a whole has largely sat within the Chinese governmental policies. With this development there has been a move from displaying primary ISI characteristics towards more advanced secondary ISI behaviour where the subsitution imports of capital is being demostrated and a move into the production of more technologically adavnaced goods and intermediate goods. There has been a developmet in the production from private owned assemblers along with the the JV with the big five Chinese auto producers, and although still not quite as competative on the world scale they are learning fast and showcaseing the manufacture their own porduction models (The Economist 2008). The autoparts sector with its liberalised autonomy in comaprison, has commenced primary satges of EOI, engaging in the exports of labor-intensive, and more simple parts to oversea markets such as the US. Alternative stratergies have been implemneted due to extra room for decisions allowing the advancemnt in technological capabiltis. As is the case with Geely (a top domestic maufatcurer) being allowd to aquire a Australian parts company DSI, and its attached interlectual competencies enhancing its gearbox technology development (Tang, R, 2009). However it is only Geely and other private producers that are showing any direction in the terms of whole assembled exportation. This can be mainly put down MNC's reluctance to introduce Chinese automobiles into the market to compete against their own domestic products, along with Chinese automobiles still falling short of world standards in terms of quality.


China's growth is unquestionable and has resulted in its recent passing of Japan and the US to become the world's largest automotive producer. This growth can be concluded in relation policy reformation using Porter's Diamond model of competitive advantage; where by the 4 forces outlined have all contributed to its advantage and growth; however they are all submerged within the government's policies (Lecture 4, D'Costa). Domestic firm structure and rivalry, in terms of the dynamics of competition, has very much been the product of governmental planning through policy implementation, with left over influences of the old command economy balanced with reformed attempts towards market capitalism. Demand conditions, have been the function of governmental liberalisation leading to a shift in social orientation, increasing the demand for automotive products. Further to this government fiscal stimulation has also been used in shaping recent demand conditions. Supporting industries such as the auto parts market have been included in the development plan and have been an equal influence upon assembly growth. Finally the factor conditions of the automotive industry have been intertwined amongst policies, which have been in place to foster internal innovation systems, technological spill over, a move into more advanced technological capabilities, and move away from simple labour along with investments in infrastructure such as improving the road networks and internal regulatory systems.

As outlined the growth has not been a one way street at the hands of MNC's and FDI, and in addition there have been many complex factors influencing the Chinese automotive industries progression, however these changes have been brought on and are embedded within governmental policy reformation. These decisions made may not have perfect, and the industry still faces many challenges, which in its self leaves room for further investigation. However in response China is maintaining its vision for growth and progression, and tailoring its policies for the future, briefly exampled in their pursuit of greener vehicles.


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